Pension tax overpayments: £46m handed back to savers in last three months

HMRC is finally addressing the long-running issue of savers being wrongly hammered when accessing pension cash, but its plans will only help some of those affected.

HMRC has been forced to repay £46 million to savers who were wrongly taxed when accessing their pension funds in the first three months of 2025, official figures show.

Between January and March, the taxman refunded more than 15,000 claims with the average sum worth around £2,881.

It means a staggering £1.4 billion has now been repaid to savers who were overtaxed on their first withdrawal and filled out the relevant HMRC form to claim their money back.

Read: how to avoid the pension withdrawal emergency tax

How pension savers get wrongly taxed

Being able to tap into our pension funds as we see fit has been one of the big selling points of the pension freedoms, and that facility has likely been even more valuable given the cost-of-living crisis. 

It means savers have been able to boost their own incomes, or even offer some financial support to loved ones who are in a more precarious position with their money.

However, there remains a significant downside to the pension freedoms ‒ the potential for being overcharged tax when making withdrawals.

It all comes down to the way that HMRC handles certain withdrawals, where the tax is calculated using a higher-rate emergency tax code. 

In effect, the lump sum you take out is treated as if that sum will be withdrawn every month, with the knock-on effect that would have on your overall income for the year. 

So if you took out £5,000, it would be taxed as if you were going to be withdrawing £60,000 for the year.

That would mean your income is treated as if you are in the higher Income Tax band, when the reality may be that for the year you bring in less than the £12,500 personal allowance, which should mean you pay no tax at all.

Total tax bill likely far higher

The £46 million refunded in the last quarter is an astonishing amount of money at the best of times, let alone in the middle of a cost-of-living crisis. 

It’s worth remembering that these are just the people who opted to put in a claim for tax overpayments now ‒ there will be many more who do so at the end of the tax year.

What’s more, there will be some who are simply unaware that they have been overtaxed and so don’t actually make a claim.

In other words, this £46 million in repaid tax is most likely just a fraction of the overall amounts that have wrongly ended up in the taxman’s coffers.

What’s more, the money repaid quickly adds up.

As mentioned earlier, savers have reclaimed £1.4 billion in over-taxation on pension withdrawals since 2015, according to analysis by financial firm AJ Bell.

'Simply unacceptable' from the taxman

The good news is HMRC is finally taking steps to address the long-running issue.

From April, it will automatically update tax codes for those on temporary tax codes who would benefit from being on a cumulative code, meaning they won't be hit with an overpayment or underpayment at year-end.

However, as Tom Selby, director of public policy at AJ Bell, points out, this will only help some of those affected.

HMRC has offered a glimmer of hope to those who take a regular drawdown income.

"From April 2025, the Government improved its tax code process so these people will be moved from an emergency code to paying the right amount of tax more quickly.

"But that doesn’t help those taking a one-off withdrawal who will continue to be overtaxed.  

“We have only just blown out the candles on the cake celebrating 10 years of pensions freedoms.

"It is simply unacceptable that after all this time the Government has still not managed to adapt the tax system to cope with the fact Brits are able to access their pensions flexibly from age 55, instead persisting with an arcane approach which hits people with an unfair tax bill, often running into thousands of pounds, and requires them to fill in one of three forms if they want to get their money back within 30 days.

“One way savers planning to take a single withdrawal in a tax year can potentially avoid the shock of a big overtaxation bill is by taking a notional withdrawal first.

"This should mean HMRC is able to apply the correct tax code to the second, larger withdrawal.

“Alternatively, you can fill out one of three HMRC forms and you should receive your tax back within 30 days.

"If you don’t do this, the Revenue says it will put you back in the correct tax position at the end of the tax year.”

Read: how to avoid the pension withdrawal emergency tax

Read: how to avoid the pension withdrawal emergency tax